The 10-year benchmark yield touched 8 per cent recently. The Indian rupee has depreciated around 13 per cent against the US dollar. Money market participants are expecting another rate hike in the next MPC meet. ET.com Mutual Funds spoke to Lakshmi Iyer, CIO -Debt & Head-Product, Kotak AMC, to find out how these factors are going to impact the debt mutual fund investors. Edited Interview.

Suddenly, many bond market participants are sure of a steep hike in policy rates. Do you believe that the rupee pain would force RBI to hike rates by 50 basis points soon?I am not very sure about a steep hike in rates. India is already witnessing one of the highest real rates in the world. Inflation, even at this juncture, does not seem to be blowing through the roof. The probability of an October rate hike has increased. If you would have asked me this question after the last monetary policy, I would have said that we are looking at one more rate hike this year in December, but now the possibility of an October rate hike has inched up.

Even without the rupee trouble, yields have been hardening. For example, 10-year yield touched 8% recently. What is your view on yields?The yield is reflecting the current macro scenario, crude oil prices, depreciating currency etc. The demand factor is missing from the market. On a very basic principle, if the supply tends to be more than the demand, you will see the yields going up. Foreign investors have also been selling lately. They bought a total of Rs 2,000 odd crore in August and they have already sold Rs 2,000 crore in the first seven days. All this is adding to the negative sentiment in the market.

What are the factors to watch out for in the coming months?Crude is behaving very volatile. It is going to be a crucial factor in the coming quarters apart from rupee that the market participants will be looking at. Mid-month will have the inflation data that is also going to be a consideration at this point. By the end of this month, you will have the borrowing calendar announced. These all are going to be very important factors for the debt markets.

What is your view on rates? Where do you see repo/10-year yield at the end of the calendar year and financial year?I think you have asked me the most difficult question. See, we are 6.50 per cent on repo rate right now. Assuming we end up at 7 per cent at the end of March 2019, then the question would be: is one per cent that is 8 per cent on the 10-year, where we are right now, is that a commensurate spread? If you look at empirical evidence, then it looks commensurate, but the lack of demand or appetite, it doesn’t seem commensurate. I am not ruling out the possibilities but that is a function of how much we are expecting the repo rate to settle at.

What is your advice to debt mutual fund investors?If we look at the mutual fund data in the last two-three years, not a huge number of investors have come to the long-duration bucket. We are already seeing the interest of investors in credit-risk funds and in last couple of quarters; we have seen an enhanced interest in FMPs (Fixed Maturity Plans). Investors should continue looking at these options. These are viable options in the current market conditions.

What about investors in long-term debt schemes? Is it time to shun these schemes?The beauty is that even though they have had a bumpy ride in the recent past, if you look at the three-, four- and five-year returns, they are not bad at all. This is what these investors look at when they invest in long-term funds. These returns are better than your traditional investment options. Despite an abrupt 13 per cent depreciation in the currency and such high yields, your schemes haven’t fallen on their faces in terms of long-term returns. So, my view is that it doesn’t make sense to exit these scheme at such elevated levels. You can choose not to put fresh investments in them. That is fine.